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Thursday, May 11, 2017

Fintech in Canada

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” ― Adam Smith

Fintech holds the promise of greatly reducing the cost of financial services for Canadians. Our big banks have little choice but to keep costs high because they have a lot of capital tied up in real estate, they have a lot of employees to pay, and most importantly, they have shareholders demanding ever-growing profits. Operating primarily online, lean fintech companies give us the hope of reduced banking fees, better interest rates, and other benefits. But it’s important to understand the motivations of fintech companies.

People like John Bogle who founded Vanguard are rare. Instead of enriching himself, he created an investment company that serves the interests of its customers. He even had the foresight to create a legal structure that created strong incentives to benefit customers instead of pitting them against Vanguard’s management.

Fintech companies are not structured this way. They seek to make money. The best way to make money fast in fintech is to attract as many customers as possible and then sell the company to one of the big banks. Not all fintech companies have this plan, but many do. After acquiring a fintech firm, the big bank will do its best to squeeze more profits from its newly purchased customers without losing their loyalty to the original fintech firm. It’s a tricky balancing act but make no mistake: this is why big banks buy fintech firms.

A longer fintech plan is to actually operate the fintech company and make money from its profits over time. Even here, though, the company’s long-term dreams would be to get closer to the kind of profitability that the big banks enjoy. The path to these profits is to start off with very customer-friendly practices to get a loyal customer base, and later try to squeeze more profits from these customers. Whether or not a fintech company seeks to get sold to a big bank, the endgame is similar: whoever owns the fintech company will try to extract more money from customers.

None of this is really different from the rest of our economy; companies seek profits. But bank customers who understand what is going on can predict how to get less expensive banking. You have to be willing to change banks. It’s not enough to jump once from a big bank to a fintech firm. You need to be prepared to leave one fintech firm for another that makes a better offer.

I’ve gone through this myself first leaving a big bank for Tangerine. Since then Tangerine has been whittling away at credit card rewards and the interest rate they pay. They have even resorted to teaser interest rates to try to compete using advertising without actually paying competitive interest rates on deposits. This has driven me over to EQ Bank.

It’s not my intention to promote one financial firm over another here. Every time I see a good deal at an online bank, I expect to have to pay attention to whether they make negative changes. I expect to have to change banks yet again. I won’t be more loyal to a bank than it is to me.

My hope is that more and more fintech firms will keep popping up to the point where the big banks can’t keep buying them all. If the marketplace becomes diverse enough that there is meaningful competition, maybe some new banks will actually decide that treating customers well is in their long-term interests. Until then, expect to have to change banks whenever your current bank’s offerings deteriorate.